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Plantation - Inventory Uptick Will Not Last

kiasutrader
Publish date: Fri, 11 Apr 2014, 12:16 PM
We are optimistic that the increase in Malaysia's palm oil inventory will not be sustainable.  We believe  that  March's higher  production  -  which benefitted from a spillover from February - will not be repeated in April,while  exports  should pick up again due to  a pullback in palm oil prices and a wider discount to soybean oil. Maintain bullish on the sector, with expectations of further price strengthening in 2Q.
  • Production  surged  in  March.  Malaysia's  palm  oil  production  rose 17.1%  m-o-m  to  1.497m  tonnes  in  March,  thanks  to  a  spillover production  from  February.  Note  that  there  was  barely  any  rainfall  in February, resulting in fruits not being able to ripen. With the arrival of rain in  March,  fruits  originally  due  to  be  harvested  in  F ebruary  were harvested in March. As this phenomenon will not be repeated, we expect April production to fall m-o-m to 1.4m tonnes or lower.  
  • Exports to recover. Exports declined in March as prices rallied to a high of  MYR2,922 per tonne,  based on West Malaysia physical price. Prices have since retreated, which will help exports. The discount to soybean oil has also  widened to USD120 per tonne vs  under USD60 in March,  as the soybean oil price has been climbing.
  • Inventory  to decline further.  We believe there is still room for palm oil inventory to fall further, as production normalises downwards in April and the  negative  impact  from  last  year's  dry  weather  kicks  in  2Q.  Exports should  also  improve  as  mentioned  above.  Given  the  production  issue, this year's inventory upcycle will likely be extremely sluggish.
  • Outlook  still  very  positive.  We  remain  very  bullish  on  the  sector  as sector  valuation  is  still  undemanding,  while  palm  oil  prices  should strengthen further in 2Q  and 3Q,  as  the adverse  impact  on production from  the  dry weather  last year  becomes evident. We also expect to see on-the-ground  evidence  of  El  Nino  in  the  not-too-distant  future,  as  the Southern Oscillation Index has been sustaining deep negative readings.
  • Top BUYs. We continue to like First Resources,  Astra Agro Lestari, IOI Corp, Bumitama Agri, Sarawak Oil Palms and Jaya Tiasa.
  
 


Source: OSK-DMG
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